3/30/2009 @ 12:00AM

Barack Obama's Bait And Switch

After only two months in office, President Barack Obama is getting skewered by many of his erstwhile admirers for his supposed incompetence, and veterans of the much-maligned Bush White House can’t help but feel a certain rueful sympathy.

Because Obama is a dazzlingly deft thinker and speaker, no one will confuse him for his predecessor. But Obama is facing a political problem strikingly similar to one that Bush faced, and he is set to tackle it in the same way. The problem, to put it crudely, is that Americans want more government, but they are not willing to pay for it. President Bush “solved” this problem by slashing taxes while slightly increasing the size of government. Obama intends to “solve” this problem by dramatically increasing the size of government while gently increasing taxes. In both cases, however, what we’re really getting is a bait and switch: a little bit more cash in our pockets right now, vastly higher taxes in a few years time.

To understand the origins of this slow-motion disaster, we have to go back to President Ronald Reagan, the last president to match Obama in the scale of his ambition. Almost 20 years ago, Congress repealed the Medicare Catastrophic Coverage Act, legislation that very nearly saved the American welfare state from fiscal doom. During his 1986 State of the Union address, Reagan called for a catastrophic insurance program designed to protect the financial security of elderly Americans facing major illnesses.

Rather than create a new entitlement out of whole cloth, Reagan insisted that the program be budget neutral and that the benefits be paid for by the beneficiaries, in stark contrast to Social Security and Medicare, which are both funded through payroll taxes on all workers. And as Eric Patashnik argues in his brilliant book Reforms at Risk, it was precisely the fiscal responsibility of the legislation that led to its demise.

Under the law, all Medicare users faced a slight increase in their monthly premiums–to the tune of $4 a month–but affluent Medicare recipients had to pay an additional surcharge that amounted to a few hundred dollars a year. A large majority of seniors would be better off under the program, and the savings on so-called Medigap policies dwarfed the increase in Medicare premiums. Opponents of the MCCA, many of whom profited from the old Medigap regime, launched a massive public campaign that misled millions of elderly voters into believing that they had to pay the maximum surcharge.

To keep the new program financially sound, benefits were phased in gradually while the premium increases were put in place immediately. The obvious result was that seniors felt the pain of premium increases without getting immediate bang for the buck. Within 16 months of the enactment of the MCCA, the legislation was repealed.

The next time Congress moved to expand Medicare, in 2003, Bush and the Republicans in Congress had learned an important lesson from the failure of the MCCA: You can expand an entitlement program, but it is crucially important that you don’t actually pay for it. Bush’s Medicare expansion did include modest income-related premiums, but general revenues fund an extraordinary 75% of it.

At the moment, everyone is fixated on Obama’s rescue plan for Wall Street, and understandably so. Over the long-term, however, his health care reform effort will prove far more consequential. And so far, Obama seems to be playing by the George W. Bush playbook: Expand government now, pay for it later (maybe).

Earlier this month, The New Republic Web site hosted a thoughtful and informed discussion of the Massachusetts health reform that has covered 85% of the state’s previously uninsured residents. One of the participants, MIT economist Jonathan Gruber, was unusually frank. An architect of the reform, Gruber acknowledged that the costs have skyrocketed as coverage has increased–but Gruber sees this as part of its “genius.”

“For decades,” Gruber writes, “efforts to move towards universal coverage have always floundered on the shoals of cost control.” But once universal coverage was achieved, or almost achieved, pressure groups rallied behind cost control efforts in order to preserve the gains for the uninsured.

As a political strategy, this is very clever indeed. It does, however, raise a number of pressing questions. What exactly constitutes an effective cost control effort? Assuming cost control efforts only go so far, will voters accept sharp tax increases? By deferring these questions, we make coverage expansion look very attractive–just as George W. Bush made his tax cuts look very attractive by deferring the question of how we’d pay for them in the years to come.

Barack Obama, like George W. Bush, came into office promising a new era of responsibility and accountability and all the rest. Like his predecessor–his far less cerebral, far less verbally dexterous predecessor–he is in fact passing a heavier burden to the next generation, which will almost certainly be the most heavily taxed generation in American history.

I want to be perfectly clear. We need to expand health care coverage, and we need to accept that this will cost a fair bit of money, certainly in the short term. But we also need to pay for this expansion, and that means more than a gentle surtax on high earners–a category that is, in case you haven’t noticed, shrinking fast as the magical billions dreamed up by an overlarge financial sector evaporate. That leaves us with a set of difficult and unattractive choices: We can impose a consumption tax, we can embrace a health care strategy based on radical deregulation, or, my preference, we can do both. What we can’t do is hope that some cost-control deus ex machina will save us in the final act.